Text kindly provided by Jane Davies BA (Hons) Cert PFS, DIRECTOR , Whitehall Group (UK) Limited
From 6th April 2014 the lifetime allowance for an individual’s total pension savings is being reduced to £1.25 million. From that date, anyone crystallising (drawing retirement benefits from) combined pension savings in excess of this figure will be subject to the Lifetime Allowance Charge on the excess.
There are however options to protect accumulated pension benefits nearing or over £1.25 million, the latest of which has just been released.
Previous Protection Regimes
You may have already protected your retirement benefits under one of the previous options of Enhanced and/or Primary Protection as at 6th April 2006 or Fixed Protection 2012 as at 5th April 2012.
If not, the two new forms of protection are:
Fixed Protection 2014
This means that from 6th April 2014, regardless of how big your pension funds are, your lifetime allowance will be fixed at £1.5 million so you can accumulate pension savings worth up to £1.5 million without paying the lifetime allowance charge as long as you do not:
- Have a contribution paid to any of your money purchase pension pots.
- Build up new benefits in a defined benefit (final salary) or cash balance pension pot above a set amount.
- Join a new pension scheme – unless you are only transferring pension savings from one of your existing schemes into the new scheme.
You have to apply before 6th April 2014 to get Fixed Protection 2014 using the HMRC form on their website. This is available from August 2013.
If you already have Primary, Enhanced or Fixed Protection 2012 you cannot apply for Fixed Protection 2014.
Individual Protection 2014
The details are not yet finalised but the proposals are:
- You must have combined pension saving in excess of £1.25 million as at 5th April 2014.
- Your Lifetime Allowance will equal this figure with an overall maximum of £1.5 million.
- You will not lose Individual Protection 2014 by making further savings in to your pension scheme.
- So, if you suffer a fall in the value of your pension savings you can top this up to your Individual Protection figure by making pension contributions – subject to the Annual Allowance / carry-forward rules.
Any pension savings in excess of your personal lifetime allowance will be subject to a lifetime allowance charge.
You will be able to apply for Individual Protection 2014 from 6th April 2014.
Those with Fixed Protection 2012 can also claim Individual Protection 2014 so their Fixed Protection Lifetime Allowance would be £1.8 million rather than £1.5 million but they can top-up a shortfall below £1.5 million at retirement by paying pension contributions.
Those with funds over £1.25 million as at 5th April 2014 should claim both Fixed Protection 2014 and Individual Protection 2014. This means that future contributions will be possible under Individual Protection if necessary. Fixed Protection will take priority giving someone a Lifetime Allowance of:
- £1.5 million if no contributions are made and no accrual occurs after 5th April 2014; or
- Their Individual Protection cap (between £1.25 million and a £1.5 million cap) as at 5th April 2014 if contributions/pension accrual takes place.
If this is done and a contribution is paid, meaning Fixed Protection 2014 is lost, it must be reported to HMRC within 90 days.
Who should consider 2014 Protection?
|Fixed Protection 2014||Anyone with uncrystallised funds over or nearing £1.25 million who accepts they must cease pension contributions/accrual.|
|Individual Protection 2014||Anyone with funds over £1.25 million.|
Effects on Auto Enrolment:
Employers had to start enrolling employees into a pension scheme from October 2012.
If you have either Enhanced Protection (2006) or Fixed Protection (2012 or 2014) and do not opt out of the auto enrolment pension scheme within one month of automatic enrolment you will lose your protection.
Your employer should tell you when you are automatically enrolled into a pension scheme.
For more information or if you would like to discuss this further please contact us